Fsa Ethical Aproach

Abstract:

This paper intends to discuss if the Financial Services Authority (FSA) has an ethical approach in relation to investment regulation. First it will explain the recent history of regulation within the Financial Services Industry until the creation of the FSA , an independent and non-governmental body, with statutory rights given by the Financial Services and Markets Act 2000. Then it reflects about the meaning of compliance competent and if FSA had adopted an ethical approach.

In the beginning...

The story of the FSA is quite recent and it started from the need to regulate and control the rapidly changing markets of the 70’s and 80’s. Prior to the FSA, the market regulation was served ad hoc, combining government regulation and a heavy element of self regulation. Changes in the international financial system made the Government to look for new solutions and at that time Professor L.C.B. Gower was asked to review the investor protection within the financial services industry in the UK.

In his report, Professor Gower wrote that ” Logic and tidiness... are important only in so far as they contribute to a legal regime which can be understood, which will be regarded as fair by those which affects and which, as a result, will be generally observed and can be effectively enforced.” (Budd, L., Whimster, S., 1992)

A White Paper in 1984 followed the report and led to the Financial and Services Act (FSA) 1986. This act is mainly concerned with protecting the private investor and is a piece of legislation that brings sole practitioners and firms of the financial industry within one statutory framework.

With the FSA 1986 was created an agency, the Securities and Investment Board (SIB), with regulatory and enforcement powers and where most of the powers under the act were delegated. The SIB was assisted by self-regulating organisations (SROs) such as FIMBRA and LAUTRO and recognised professional bodies (RPBs). The SIB had power to make rules with legislated effect and reported to the Chancellor of the Exchequer. It maintains a list of authorised firms called the central register.

Unlikely its American counterpart SEC, the SIB was totally financed by the city but accountable not to the city but to the government (Budd, L., Whimster, S., 1992).

The Financial and Services Act 1986 was replaced by the Financial Services and Markets Act 2000. The SIB was replaced by the Financial Services Authority (FSA), and all the SRO’s were incorporated into this single regulator.

The new regulator, FSA, had under the act, four statutory objectives: market confidence, public awareness, consumer protection and the reduction of financial crime. These are supported by principles of good regulation such as efficiency and economy, competition, innovation, proportionality, role of management, innovation, international character.

Compliant competent and sustainable regulation:

In August 1989 Oonagh McDonald, was invited by the SIB to undertake a study about competence among professionals working under the regulation of the recently Financial Services Act, 1986. McDonald emphasises the terms competence and compliance as a criteria for working in this industry. Although the FSA does not directly refer to these terms it said that investment business should be performed by “fit and proper persons”. In his report on investor protection McDonald wrote:

“Regulators and Practitioners alike have increasingly emphasised that 'fit and proper' persons obviously have to be 'competent' and that compliance with rules requiring suitable and 'best advice' has to be based on a thorough knowledge of the investment products available as well as the skill to relate such information to the customer's needs.”(McDonald, O., 1990)

Following the suggestions in this report, was initiated a Training and Competence Scheme (T&C scheme) by the Personal Investment Authority (PIA), a body created from the fusion of two other self-regulatory bodies (LAUTRO & FIMBRA), under the SIB. This program existed in order to make sure that all financial advisers perform their job to the highest standards of proficiency and ethics (PIA, 1995).

In Consultation Paper nÐ'Ñ"34 (FSA, CP 34, 1999), the FSA draws their approach to competence. This is made of training and evaluating the employee knowledge and skills while performing their role. The assessment is made of examinations and practical application. Additional training, updating programmes, constant supervision of competence is fundamental to maintain a high level of standards, minimise any risk and enable the employee to gain on-the-job experience. Because the constant need for training, refreshing programmes and supervision, the FSA offers aid and states that training and competence programs are a partnership. It’s very important the idea of regulator and regulated joining efforts and working together as partners (Davies,H., 2000). After the Consultation Paper nÐ'Ñ" 34, the FSA published another consultation paper with feedback over the previous document, where need for training and competence was reinforced in the industry as fundamental for a healthy market and for the realisation of the FSA four main regulatory objectives (FSA, CP 60, 2000).

Competence, compliance, accessing skills and knowledge of employees, regular training procedures, were more than ever part of the FSA documentation and the financial services industry syllabus (Edwards, J., 2005). Competence started progressively to be seen as affecting not only the individual but also having a deep impact on the whole firm mentality and culture (Storer, G. & Rajan, A., 2002). Compliance is more likely to exist within a firm that as it embedded and incorporated in their core values and organisational culture (Edwards, J.,Wolfe, S., 2006).

More and more firms recognised that competent, compliant, honest, integrity and diligent employees would only work within organisations that adopt these principles (Edwards, J., 2003). More recently, senior manager has been required to operate internal systems and controls in order to ensure that employees behave in a compliant and competent way, and to identify and monitor risks. Compliance competent organisations are those fulfilling these requirements.

Based on the works of Jackman and Wood, the FSA proposed a compliance competence partnership approach model. This model is constituted with three key elements intrinsically linked and all of equal importance: good compliance practice, good ethical practice and a positive FSA relationship (Edwards, J.,Wolfe,